Marjen, Inc. just paid a dividend of $5. Marjen stock currently sells for $73.57. The return on stocks like Marjen, Inc. is around 10%. What is the implied growth rate of dividends.

Question

Quizplus · Accepted Answer

The implied growth rate of dividends can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity), which is P = D / (r - g), where P is the current stock price, D is the dividend just paid, r is the required rate of return, and g is the growth rate of dividends. Rearranging the formula to solve for g gives us g = r - (D / P). Substituting the given values: g = 0.10 - ($5 / $73.57) = 0.10 - 0.0679 = 0.0321 or approximately 3%.